FindAGoodCPA.com - Not a healthcare professional? Find a CPA or EA who understands the tax issues specific to you.
Nanny Taxes - Find out what's involved with complying with the Nanny Tax Rules
IRS Web Site - for
tax forms, publications, and general tax information.
MONTHLY TAX NEWSLETTERApril 2013
Tactful tax talk: Tax Time, a Tax Trap, a Tax Trend, and a Terrific Tax Trifecta.
Anyone born before 1970 and living in New
England remembers the Blizzard of 1978. Because my father was a practicing
CPA at the time, I remember that the the tax filing due date was pushed back one week that
year due to the blizzard. (My neighbor Bill who is from Kewanee, IL
told me about the Blizzard of '79 that hit the Midwest the year after the
Blizzard of '78, but I'm not
sure if he's telling me the truth or was just trying to one-up me.)
Well, this year we had some crazy weather in the Boston area, including one of the biggest blizzards in recorded history. So the tax filing due date must have been extended past April 15th this year, right?
The answer is No. That means that you need
file something by 4/15. Make sure to either file your tax return or file for an
automatic extension by using a
For example, what
happens if you owe $10k in federal income taxes and ignore the April 15th filing
deadline? By not submitting your your tax return or extension request,
expect to pay a Failure to File penalty of $500 per month on the $10k you owe.
By filing something, the penalty would have been reduced by 90% to $50 per
Let's say you earn $200k, and your total
federal tax liability is $40k. You can hold off paying the IRS up to $4k
with the filing of the extension, and then pay that amount when you file your
returns in the fall. The cost of borrowing that money from the IRS is just
interest of a few percent per year. That's cheaper interest than what most
credit cards charge.
The notices said they owed $5k in one case and $10k in the other. Neither owed these taxes, but didn't know what to do. My office deciphered what was going on and then responded on their behalf, helping both got their respective issues cleared up. In my neighbor Bill's case, instead of owing $5k to the IRS, the IRS now owes him $85.
For starters, if you ever get an IRS notice, don't assume the IRS is correct. Before you pay any money, have someone who knows taxes take a look at the notice. We see a lot of these automatically generated notices from the IRS that our clients receive, and most of the time the IRS is not correct and our clients don't owe any additional taxes.
You generally have 30 days
from the date of the IRS notice to respond, but
you can generally always call the phone number on the notice to get the due date extended.
Whatever you do, don't ignore the notice! And please don't automatically
pay the additional taxes reflected on the notice without fully understanding why
additional taxes are being assessed. Consider seeking help from a tax
professional if you have no idea why the IRS is proposing a change to the tax
returns you filed. An hour or two of their time could save you thousands
in unnecessary taxes.
For 2012, married couples could contribute $6,250 to an H.S.A. and single individuals could contribute $3,150.
We wrote about H.S.A'.s in our
May 2012 newsletter.
In the world of horse racing, a Trifecta is picking the first three horses in order of finish. It's tough to win a Trifecta, but if you do win, the payout tends to be quite large.
Here is how to win the Tax Trifecta:
Tax time, tax trap, tax trend, and a terrific tax trifecta.
In response to what was referred to as the “fiscal cliff” Congress passed and the President signed The American Taxpayer Relief Act of 2012 into law earlier this year. For estate planning attorneys and their clients, the Act responds to many of the uncertainties that we have been dealing with for the past several years related to the “sun-setting” of the Bush-era tax cuts which Congress extended for two additional years in 2010.
For the past two years, the estate and gift tax exemption amounts have been $5,000,000 and the top tax rate has been 35%. These temporary rates were scheduled to return to a $1,000,000 exemption amount and a top tax rate of 55% first in 2011 and then again on January 1 of this year. This uncertainty has made planning difficult during the last few years.
The Act has permanently set the exemption amount at $5,000,000 (with an inflation index so the amount is currently $5,250,000) for gifts made and individuals dying after December 31, 2012. It also set the top estate and gift tax rate at a compromise level of 40%.
The fact that the Act made these amounts and rates permanent is good news; however, recent history has demonstrated constant flux in our federal tax laws with significant legislation enacted approximately every two years. It is because of this we are wary that “permanent” only means that the law no longer has an expiration date. It is always possible that the law could change when new legislation is enacted.
In a discussion of the gift and estate tax system it is important to understand that the exemption amount is different from the annual exclusion amount and the use of one does not reduce the availability of the other.
Making gifts using the annual exclusion amount is a very potent estate planning tool. It is common practice for grandparents to make annual exclusions gifts to children and grandchildren to reduce the value of their estate. This means a husband and wife with four married children and ten grandchildren can each make 18 annual exclusion gifts a year and reduce their total estate by a combined $504,000 each year. This also reserves the full amount of their exemption amounts at death.
When Congress extended the Bush-era tax cuts in 2010, the concept of portability was added to the arsenal of estate planning tools. The Act made portability permanent. Portability allows a surviving spouse the opportunity to elect to apply any unused exemption amount to their own transfers during life and at death. In other words, if Wife dies in 2012 survived by Husband and only $4,000,000 of her exemption amount is used an election can be made allowing the husband to benefit from her unused exemption of $1,250,000 during his life or at his death. This is in addition to his own $5,250,000 exemption amount which will allow him to shelter upwards of $6,500,000 of assets from gift taxes during his life or from estate taxes at his death. In order to retain the unused exemption amount the proper elections must be made and documentation filed with the IRS at the death of the first spouse.
Portability only applies to the federal gift and estate tax exemptions and not to any state gift or estate tax exemptions. Portability was intended to provide additional relief in many circumstances, but it should not be confused as a substitute for proper estate tax planning. In fact, the $5,250,000 exemption amount removes many people from the federal estate tax system but it does not change their state estate tax liability. Many states moved away from the old estate tax system years ago and now have their own estate tax laws. Many states also have a much lower estate tax exemption amount; in a great deal of states that amount is only $1,000,000 so it is still important to plan for state estate taxes.
For example, in states like Massachusetts, people that are close to but not over the federal exemption amount may suffer from improper or no planning and may unintentionally subject their heirs to an unexpected state estate tax bill in excess of $400,000. A properly drafted estate plan can at the very least delay that tax bill and at best, avoid it altogether.
Estate tax and gift tax planning is a process that evolves as your financial needs and concerns change over the years. An attorney with a focus on estate planning is an important part of your team of financial and wealth advisors.
Woodman & Eaton, P.C. is an independent law firm providing personalized, objective advice and counsel to individuals and families, with a stated goal to help their clients achieve peace of mind that they have developed a plan to accomplish their objectives.
|Copyright 2013 The MDTAXES Network by CPANiche, LLC Email us at firstname.lastname@example.org|